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Saturday, 11 October 2014

Islamic development finance to target infrastructure, SMEs

The next two years may see Islamic banks and financial institutions investing more of their estimated $1.7 trillion worth of assets in infrastructure as well as small and midsize enterprises.

Officials from the Islamic Development Bank, World Bank and Moody’s, among others, discussed development opportunities for Islamic finance Thursday during a panel discussion at the World Bank’s annual meetings in Washington, D.C.

“One of the tenets of Islamic finance requires tangible assets, and infrastructure projects for governments provide those assets,” said Aamir Rehman, managing director of Fajr Capital, referring to standards of practice among Islamic finance institutions that adhere to Islamic principles, such as interest-free loans and investments.

“With a zero percent interest rate, we have already seen governments investing in infrastructure,” said Jamel Zarrouq, chief economist at the Islamic Development Bank. “It means for some governments a free lunch.”

While conventional finance institutions still dominate project funding, some speakers argued that certain features of the Islamic finance landscape are proving more conducive to investment.

“There is empirical evidence that Islamic finance is more resilient to economic shocks, indicating supreme financial stability,” said Abayomi Alawode, head of Islamic finance at the World Bank’s Finance and Markets Global Practice.

Zarrouq suggested that Islamic finance is also linked fundamentally to ethical finance — something that has been missing in conventional investment banks.

Still, challenges remain for Islamic financial institutions, not least of all the West’s misconceptions of Islam.

“People hear the word ‘Sharia’ and they don’t like it, they think of chopping off hands,” joked Alawode, the moderator of Thursday’s discussion at the World Bank headquarters.

Other Islamic institutions, the experts pointed out, have circumvented the obstacle.

“I like the Turkish model,” said Khalid Howladar, global head of Islamic finance at Moody’s Investor Service. “They call it ‘participation finance.’”

Semantics, though, aren’t the only issue.

“In terms of infrastructure development, project finance capacity is still quite limited,” Howladar said. “Conventional finance is much more competent, though I do see a confluence in the next 18 to 24 months in those markets.”

A broader development portfolio will also likely mean a call for implementers and regional expertise, according to Khaleel Ahmed, chief investment officer at the International Finance Corp.’s global financial markets department.

“Islamic banks should barter with institutions [that] can perform those services to support SMEs,” Ahmed said. “And a bigger problem is risk management, because the metrics have to be developed. I was looking at a bank and there was a critical need for revamping risk management. We have to build capacity and also improve governance.”

With a larger piece of the development pie, Islamic banks could look to a range of sectors for investment in Muslim and non-Muslim communities. The World Bank, which already employs a Sharia-compliant investment strategy, hopes to invest in health and environment.